Productivity Losses Ignored in Economic Analysis of Climate Change

Just last week “The New Climate Economy” (NCE) report was released with much publicity. Its main message is that investments in “green energy production, transport and industrial development” will entail slightly higher capital costs than business-as-usual infrastructure expenditures, but that these will largely be offset by lower energy supply requirements. Such transformation, the report argues, would further achieve benefits to human well-being and sustain the natural environment.

This new economic case for climate action could be further strengthened by taking into account the billions of US dollars lost due to heat related labour productivity losses that result from climate change. Analysis needs to consider the physiological limits of all human beings exposed to ambient heat when they work. These limits have been described in the public health science literature for many years, but the links to climate change have only recently caught the attention of health scientists and economists.

The United Nations University, at its International Institute of Global Health (UNU-IIGH) and Institute for Environment and Human Security (UNU-EHS), is carrying out research and global analysis on different aspects of climate change impacts on health and human security. The links to economic performance in communities and nations are becoming more evident. This adds to the reasons for strong global and national policies for climate change mitigation and adaptation.

It is now well established that “global warming” is taking place and in many hot areas of the world the temperatures are so high that life becomes difficult. For instance, in Singapore the number of days per year when the heat index level (WBGT) in the shade goes above extreme heat (WBGT > 29 °C ) has increased from 10 days in 1980 to 70 days in 2011 (Kjellstrom et al., 2013).

Links between climate condition, work capacity and the economy

There is a clear relationship between workplace heat conditions and economic performance and sustainable development. Beyond a certain heat exposure level (temperature beyond 30-40 °C, depending on humidity level) the hourly work capacity goes down. Such high heat is already common during hot seasons in many tropical and sub-tropical countries, and also in the southern US, southern Europe and Australia. This results in reduced work capacity, lower labour productivity and losses of economic output.

While the issue has occasionally been raised at academic conferences since 2000, it was only in 2009 that my co-authors and I published a first global analysis of the reduced work capacity due to increasing heat. In that research, we estimated that the reductions of average annual fully operational work days in 21 global regions would add up to 18 percent losses due to climate change in the worst affected regions by 2050, assuming the same workforce distribution (percentage in agriculture, industry and services) as at the “baseline year” 1975. When we considered estimated changes of the workforce until 2050, we found that the resulting work days lost was generally in the range 0.2 to 4 percent. These regional estimates were later used in the first economic impact analysis of labour productivity loss.

Two other reports (by Solomon M. Hsiang and John P. Dunne et al.) have also raised the issue of labour productivity loss as a factor in economic impacts of climate change, but they have not presented actual economic impact calculations. Each analysis has used different methods to assess the impacts, which strengthens the conclusions about losses taking place.

Outdoor work is particularly affected by hot climate conditions due to the extra heat load from solar radiation, but millions of indoor workers are also affected as many factories and workshops in tropical countries lack efficient cooling systems. A number of reports on the perceived heat stress and effects in such workplaces are available (Kjellstrom et al., 2014). These examples show the conditions in which many millions of workers are exposed to heat during the hottest seasons each year.

The UNU-EHS report “Pushed to the limit” and the developing cooperation between UNU/IIGH and the Hothaps program (see: www.ClimateCHIP.org) are highlighting evidence on the effects of ambient heat on daily life, population health, labour productivity, economic performance and human security in the context of climate change. (Hothaps = High Occupational Temperature Health and Productivity Suppression).

The first quantitative estimates of the economic cost of excessive heat at work in various countries is the “Climate Vulnerability Monitor 2012” report, which concluded that the increased cost of heat induced labour productivity loss globally would be approximately US$2 trillion in 2030. Large individual countries could lose up to several percent of their annual GDP creating multi-billion dollar losses. Our update of the work on capacity loss analysis that underpinned that report will be available soon (Kjellstrom et al. forthcoming). It uses a detailed global grid cell analysis to calculate heat related losses in 21 regions. The 10 worst affected regions are shown in the Figure.

Work capacity loss (% of daylight hours) in 2030 and 2050 based on regional climate change (average of 3 models), populations and estimated workforce distributions at each time.

As an example, the annual daylight work hours lost in India (the largest country in South Asia) may be 5 percent more in 2050 than in 1975 (see Figure). If the percentage loss of annual “productive work hours” reduces the annual GDP for countries in a similar manner, the losses will be substantial. The GDP of India in 2050 has been estimated by PriceWaterhouseCoopers at US$ 21 trillion. Without climate change since 1975 it could be 5 percent —- or US$ 1 trillion — larger. Similarly, for other large emerging economies the losses will be very high. If these economic outputs were not lost due to climate change, major community investments in health, education, energy supply, transport, etc, could be easier to provide. Labour productivity losses occur each year, so the accumulated economic losses after a few decades will have a significant effect on poverty reduction and economic development in many low and middle income countries.

A recent report, “American Climate Prospectus”, is the first large-scale analysis with a separate chapter on labour productivity. It bases its analysis on a “time use study” and concludes that heat related losses of labour productivity in 2050 and 2090 in the United States would be the largest actual economic costs of climate change — amounting to approximately 0.2 percent of GDP in 2050. Heat related mortality costs would be even higher, but these estimates are based on “statistical value of life” for all age groups, and therefore are not so directly linked to the national economy. The cost for the US in 2050 at 0.2 percent of a GDP — that year estimated at US$ 38 trillion — can be calculated to US$76 billion per year. This is in a similar range as the US$35 billion estimated for the US in 2030 by the “Climate Vulnerability Monitor 2012” report.

The estimates in the Figure have incorporated a shift within the workforce from heavy outdoor labour to less arduous labour in shade or indoors. Such workforce changes will reduce the regional estimates of climate change impact, and these estimated changes explain some of the changing patterns between 2030 and 2050. In any case, if the regional loss of productive daylight work hours leads to similar losses in the GDP of countries, the estimated actual losses of national GDPs can be many billion US$.

The New Climate Economy report that was published last week does not factor in these costs, which, as I note at the start of this article, would further strengthen the economic arguments for urgent climate change mitigation policies and actions.

Key questions that deserve urgent attention

At the UN Secretary-General’s Climate Summit 2014 this week, UNU is hosting a thematic session on “The Economic Case for Climate Action” that will encourage and facilitate the emergence of new ideas on a number of important questions, such as:

How can countries strengthen their economic performance while tackling the challenges posed by climate change?

In which way should we broaden the climate change discourse from a scientific and environmental perspective to an economic and social perspective?

What are the economic impacts of extreme weather events and rising sea-levels?

Which transformations are needed to ensure sustainable supply of water, food, and electricity for all communities, and how we build cities and transport people and goods to ensure a healthy planet while fostering strong, climate resilient economies?

What are the actual impacts of a heating climate on working people and the local economies already now, how much worse can it get, and which technical or other solutions need to be applied to reduce the impacts?

It should be emphasized that the analysis and debate concerning the economic consequences of climate change need to consider the “loss and damage” and how the climate change threats should be acted upon. Many low and middle income countries consider that they have contributed little to ongoing global climate change, while they will be the main victims of the negative effects. For instance, the “Climate Vulnerable Forum”, an organization of 20 low and middle income countries, is pursuing analysis and campaigns on this issue.

One can argue that this topic is an important human security and human rights issue (as do Koko Warner et al.), and that the countries that have until now emitted most of the greenhouse gases have a special duty to reduce their own emissions. The additional economic arguments for climate change mitigation that emerge from the recent reports support such conclusions, but this does not reduce the need to consider what other actions can be taken in tropical and sub-tropical low and middle income countries, such as:

Actions to build resilience against current and future effects of hot climate conditions

Adaptation to protect working people from current high heat levels

Applying “green technology” for energy systems, cooling of buildings, transport and economic activities, when feasible, so that the contributions to global greenhouse gas emissions are limited

Participate in research and analysis that builds evidence on the impact of climate on economic progress and the global need for climate change mitigation

Resilience building involves improved health services and infrastructure, such as water and sanitation, and electricity supply. Much of the projected infectious and vector-borne disease growth related to climate change can be prevented via known public health actions. Specific adaptation methods can have the same beneficial outcome, and it should be pointed out that many health promoting policies and actions (such as greater use of public transport and bicycling in urban areas) now create climate change co-benefits: the same action improves health and reduces greenhouse gas emissions.

Finally, the continued research and analysis on this topic needs to consider at what stage in the climate change progress resilience building and adaptation will not be sufficient: mitigation is the only way to protect large communities. If we do not take actions now millions of people may be “pushed beyond the limit” and their communities and countries will suffer in several ways, including economically. Recent economic analysis indicates important benefits of preventing climate change and, by adding the labour productivity loss, the estimated benefits will be even greater.